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Response to Client Ii

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Response to Client Request II
Charles Thornton, Christine Collins, Jose Rodriguez, Vanessa Van Kirk
ACC 541
September 23, 2013
Sonja Wilson

Response to Client Request II
As requested, the staff has prepared a base analysis of the information you have requested. While the staff waits for the lawyer to determine the probability of a loss in this lawsuit, our staff has researched and prepared an analysis to help educate you and prepare you for the different outcomes. This includes how your accounting department will need to account for the contingency and how that may affect your company’s ability to pay the mortgage and the impairment of the patent.
In 1975, the FASB issues SFAS No. 5, which establishes standards of financial accounting and reporting for loss contingencies (Summary of SFAS No. 5, n.d.). SFAS explains two types of contingencies. In your company’s case we will cover the loss contingency. First before reporting a potential loss you must determine its likelihood of occurrence. FASB defines the criteria for reporting contingencies in three categories: (1) probable meaning the loss is likely, (2) reasonably possible meaning the loss is more than remote but less likely, or (3) remote meaning the loss has a slight chance (Schroeder, Clark, Cathey, 2011).
Once the lawyer has determined the likelihood of loss for your company, the accounting department will charge the contingencies against income and record a liability, only if two conditions are met: (1) “Information available before the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, (2) The amount of the loss can be reasonably estimated” (Schroeder, Clark, Cathey, 2011). If neither of the above conditions is met then the loss is reported as a footnote disclosure when there

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